Old Turkey says be right and sit tight with gold stocks
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
When I first began to invest in the stock market over 20 years ago, I was determined to become the best investor possible. I watched CNBC daily, read Barron’s and countless other mainstream paraphernalia…….and promptly lost over 50% of my investment capital in just two years.
After losing a large sum of money by listening to mainstream media, be sure to get your money’s worth by learning from your mistakes. Although this was an expensive lesson, it was an essential one, which motivated me even more to become a successful investor in the stock market.
After a few all-night drinking binges’, I decided to do some contrarian research and came upon a newsletter entitled Dow Theory Letters and the living legend that published this highly successful service, Richard Russell. Sadly, in 2015, Mr. Russell left us after an incredible 91-year lifetime of helping countless investors reap fortunes in the stock market.
I don’t know whether to thank the old master, or condemn him for introducing me to the most fascinating, frustrating, and volatile sector on the planet that is the precious metals miner complex. Please see this column entitled “Miners on the Verge of a Multi-Year Breakout….Again” for my account of how frustrating and treacherous this sector has been recently.
There have been countless lessons I have learned from Mr. Russell over the years until his passing and one of the best was to find an unloved and completely decimated sector that has made a solid bottom. Then, overweight your portfolio into that sector and hold on until it matures. This is the best way to make big money in the market.
Despite the huge move gold has already made since breaking out of a 6-year base last summer, the 20-year monthly chart of the HUI/Gold ratio shows the incredible value gold stocks are presenting investors in relation to the price of gold at this time. This ratio double topped in 2006 and although the gold price hit an all-time high in 2011 at $1920, it shows gold stocks have been mired in a 14-year bear market in relation to the price of gold ever since.
However, the gold stock bear market may have ended with a double bottom in the HUI/Gold ratio just a few months ago. Since the panic low in the precious metals sector took place in mid-March, I have been recommending readers of this column to accumulate long-term holding positions in the mining complex before the breakout occurred last month. Now that the “Bear Trap Bottom” in the GDX has been confirmed with a monthly close above 7-year resistance at $32 in mid-April, weakness in the sector continues to be bought down the food chain of riskier juniors.
Enter Mr. Russell’s words of wisdom “hold on until the sector matures” which harken back to a character known as “Old Turkey” from whom famed trader Jesse Livermore learned so much nearly 100 years ago. In Edwin Lefevre’s “Reminiscences of a Stock Operator”, published in 1923, Livermore recounts this valuable lesson from Old Turkey:
“And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this it is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.”
I have been waiting for “Old Turkey Time” in this sector since the first phase in the miner bull market during H1 2016 took nearly four years to consolidate. After the nearly 85% decimation of the GDX from 2011-2015, a short-cover fueled rally took the global miner ETF into an over-extended 160% move in 6-months which saw many juniors run 10x or more into August of 2016.
However, after this sharp move higher fizzled out as gold reached critical resistance at $1375, many juniors were sold down to their respective early 2016 lows and some lower still. Once long-suffering miner speculators finally threw in the junior towel just a few short months ago, there were literally no sellers left which created an even more attractive entry point for bold and cashed up contrarians.
With the Federal Reserve now going down the Modern Monetary Theory (MMT) road in an attempt to keep shut-down state economies afloat, the result of these desperate actions are already showing early signs of stagflation in the U.S. economy. Last week, the Labor Department reported that prices U.S. consumers paid for groceries jumped 2.6% in April. This was the largest one-month rise since February 1974, when stagflation in the U.S. economy assisted in taking gold from roughly $100 that year, to $850 by January of 1980.
With the GDX having broken out of a huge 7-year base recently, gold stocks are beginning to spark the interest of generalist investors. Moreover, hedge fund luminaries and momentum players have begun to come into this tiny sector and continue to buy the precious metals mining complex on weakness.
If you are already fully invested in the space, then just think of Old Turkey when the sector is experiencing a correction. There is strong support at the breakout region of $30-$32 in the GDX, while the technically measured target of the breakout is $50. If you are still accumulating, then buy weakness in quality miners and hold fast until this impulse move from the 7-year accumulative base has matured.
If you require assistance is choosing the best juniors to accumulate for the long-term, stop by my website at www.juniorminerjunky.com and sign up for my free email list. You will receive this column in your inbox each week, along with current interviews. Although the 250-membership cap has been reached in the JMJ subscription service, place your name and email address on the waiting list if you are interested in becoming a member and you will be contacted once spaces open up.